Needs-based scholarship procedures receive approval

Plain-English summary

A private foundation proposed scholarships for financially needy residents of a specified locality attending a named school. The school's president and dean of students would serve as the selection committee, with emphasis on diligent students who might be average academically but likely to benefit in personal development. Awards could not go to disqualified persons, would be paid directly to the school, and would use class-year benchmarks tied to the economic value of historical scholarship amounts. The foundation would obtain reports, investigate and recover diverted funds, withhold further payments when necessary, and maintain detailed grant records. The IRS approved the procedures under IRC § 4945(g)(1) and stated that awards used for qualified tuition and related expenses would not be taxable to recipients, subject to IRC § 117(c).

Ruling snapshot

• Question: Did the foundation's needs-based college scholarship procedures satisfy the advance-approval rules for avoiding taxable expenditures?
• Outcome: Approved
• Key authorities: IRC §§ 117 and 4945(g)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
P.O. Box 2508
Cincinnati, OH 45201

Release Number: 201451053
Release Date: 12/19/2014 Employer Identification Number:
Date: 9/25/14

Contact person - ID number:

Contact telephone number:

LEGEND:

UIL: 4945.04-04

X = Location
Y = State
Z = School
B = $
C = $
D = $

Dear

You asked for advance approval of your scholarship grant procedures under
Internal Revenue Code section 4945(g). This approval is required because you are
a private foundation that is exempt from federal income tax. You requested
approval of your scholarship program to fund the education of certain qualifying
students.

Our determination

We approved your procedures for awarding scholarships. Based on the information
you submitted, and assuming you will conduct your program as proposed, we
determined that your procedures for awarding scholarships meet the requirements
of Code section 4945(g)(1). As a result, expenditures you make under these
procedures won't be taxable.

Also, awards made under these procedures are scholarship or fellowship grants and are
not taxable to the recipients if they use them for qualified tuition and related expenses
(subject to the limitations provide in Code section 117(c)).

Description of your request

Your purpose is to provide scholarships to students who are residents of X and in any
event shall be residents of the State of Y attending Z. The number of scholarships that
will be awarded each year and the amount of each scholarship will vary depending on the
amount of funds available to be distributed. The scholarship is advertised on Z's website.

Letter 4792 (10-2012)
Catalog Number 58263T

Each year the trustee advises the scholarship committee of the amount of funds available
to be awarded as scholarship. The members of the scholarship committee review the
scholarship applications and rank the applicants based on financial need. The
scholarship committee then submits its selection to the trustee along with the amount of
the award. The trust document names the President and the Dean of Students of Z as
the selection committee. All scholarships are awarded an objective and non-
discriminatory basis. No scholarship may be awarded to any disqualified person as
defined in Code Section 4946.

Eligible students must be in need of financial assistance, with a particular emphasis on
diligent students who may be average scholastically, and not necessarily in the upper
part of the class, but who will be likely to benefit in terms of personal development.

The Trustee pays the scholarship proceeds directly to the university/college the recipient
attends for the benefit of the recipient. The trustee provides a letter to each
university/college specifying that the university/college’s acceptance of the funds
constitutes the university/college’s agreement to (i) refund any unused portion of the
scholarship if a scholarship recipient fails to meet any term or condition of the
scholarship; and (ii) notify the trustee if the scholarship recipient fails to meet any term or
condition of the scholarship. If the university/school will not agree to such terms the
trustee will obtain the needed reports and grade transcripts from the scholarship
recipient.

The dollar amount of each scholarship each year shall be in the sole discretion of the
trust committee of the trustee, but in setting such amounts the trust committee shall
attempt to make the total amount of each said scholarship approximately the equivalent,
in economic value and benefit to the recipient, to that which would have been provided by
scholarship during the academic year 1973-1974:

(1) For a student of freshmen class standing at the beginning of the academic
year in the amount of $B;

(2) For a student of sophomore class standing at the beginning of the academic
year in the amount of $C;

(3) For a student of junior class standing at the beginning of the academic year in
the amount of $D.

Each scholarship shall be paid in such increments and at such times during the academic
year as the trust committee of the trustee shall determine.

You will maintain case histories showing recipients of your scholarships, or educational
grants, including names, addresses, purposes of awards, amount of each award, manner
of selection, and the relationship (if any) to officers, trustees or donors of funds to you.

Letter 4792 (10-2012)
Catalog Number 58263T

You will arrange to receive and review grantee reports annually and upon completion of
the purpose for which the grant was awarded; to investigate diversions of funds from their
intended purposes; and take all reasonable and appropriate steps to recover diverted
funds, ensure other grants funds held by the grantee are used for their intended
purposes, and withhold further payments to grantee until you obtain grantees assurances
that future diversions will not occur and the grantees will take extraordinary precautions
to prevent future diversions from occurring.

You will maintain all records relating to individual grants, including information obtained to
evaluate grantees, identify whether grantee is a disqualified person, establish the amount
and purpose of each grant, and establish that you under took the supervision and
investigation of grants .

Basis for our determination

The law imposes certain excise taxes on the taxable expenditures of private foundations
(Code section 4945). A taxable expenditure is any amount a private foundation pays as a
grant to an individual for travel, study, or other similar purposes. However, a grant that
meets all of the following requirements of Code section 4945(g) is not a taxable
expenditure.

• The foundation awards the grant on an objective and nondiscriminatory basis.
• The IRS approves in advance the procedure for awarding the grant.
• The grant is a scholarship or fellowship subject to the provisions of Code section
117(a).

• The grant is to be used for study at an educational organization described in Code
section 170(b)(1)(A)(ii).

Other conditions that apply to this determination
• This determination only covers the grant program described above. This approval
will apply to succeeding grant programs only if their standards and procedures
don't differ significantly from those described in your original request.

• This determination applies only to you. It may not be cited as a precedent.

• You cannot rely on the conclusions in this letter if the facts you provided have
changed substantially. You must report any significant changes to your program to
the Cincinnati Office of Exempt Organizations at:

Internal Revenue Service

Exempt Organizations Determinations
P.O. Box 2508

Cincinnati, OH 45201

• You cannot award grants to your creators, officers, directors, trustees, foundation
managers, or members of selection committees or their relatives.

Letter 4792 (10-2012)
Catalog Number 58263T

• All funds distributed to individuals must be made on a charitable basis and further
the purposes of your organization. You cannot award grants for a purpose that is
inconsistent with Code section 170(c)(2)(B).

• You should keep adequate records and case histories so that you can substantiate
your grant distributions with the IRS if necessary.

Please keep a copy of this letter in your records.
If you have questions, please contact the person listed at the top of this letter.

Sincerely,

Director, Exempt Organizations

Letter 4792 (10-2012)
Catalog Number 58263T